What’s ahead for quantum tech and the hedge fund industry?

Accurate data and precise predictions are gold dust to the hedge fund industry.

And while machine-learning capabilities are helping to deliver significant signals, generally they still only provide statistical analysis of multidimensional big data.

But now, an emerging technology – quantum computing – may offer an opportunity to crunch vast amounts of data at superfast speed and fill in the probability gaps.

So what’s behind the tech being described as a “greenfield area of exploration for finance”? Let’s dig in.

What is quantum computing?

It is complicated! It is based on quantum physics and the fact that specific properties of particles can be in two states, or any combination of the two states, at the same time. Whereas traditional computers operate binary processing systems, based on 1 and 0s, quantum systems use ‘qubits’ that can be one and zero at the same time.

What is the big advantage of quantum computing?

It means these super-computers can store and process information at giddy speeds. They are also brilliant at tasks such as optimization problems, data analysis and simulations.

Who is behind the development of quantum computing?

There is lots of (academic and corporate) research taking place. Many firms are already investing in the field, with some, such as IBM, Google, Alibaba, Hewlett Packard, Tencent, Baidu and Huawei, all doing their own research.

What have been the results so far?

They’ve been pretty impressive. In 2019, Google claimed that it ran a calculation on a quantum computer in just a few minutes that would take a classical computer 10,000 years to complete. In 2020, a team from the Chinese University of Science and Technology team said that it had beaten this. It claimed its computer had achieved within a few minutes what would take half the age of Earth on the best existing supercomputers.

Why is quantum computing so exciting?

It means limitless possibilities, literally. Scientists have long predicted that quantum computers could tackle certain types of problems — especially ones with a high number of variables and potential outcomes — much faster than any classical computer. Now real proof is appearing.

How might quantum computing benefit asset management?

It’s all about edge. The best hedge fund strategies are based on decoding markets and finding the invisible profitable patterns. Finance is often about solving issues that have probabilistic outcomes, like portfolio optimisation. So imagine if you could determine in real time the best possible basket of various assets and securities for any given shifting market environment?

Are any hedge funds exploiting quantum computing yet?

It’s in its infancy but it’s coming. At least four hedge funds including Two Sigma, Renaissance, DE Shaw, and WorldQuant are all experimenting with quantum computing systems. “It's amazing what we could do with quantum computers,” Vern Brownell, chief executive officer of D-Wave, the first to develop a commercially available quantum computer, told the Financial Times recently. He says his company has had “a lot” of discussions with banks and hedge funds.

Where is the sweet spot for finance with quantum computing?

Quantum computers are particularly promising when algorithms are powered by live data streams, such as real-time equity prices, which carry a high level of random noise. In valuation, being able to quickly identify an optimal risk-adjusted portfolio is likely to create significant competitive advantage. For loan and bond portfolios, accurate estimates of credit exposures could result in better optimization decisions. Equity and FX trading are exciting areas too, given their demand for ever-more precise market risk and scenario calculations.

What’s ahead for quantum computing in the finance sector?

Its development looks certain to enhance the ability to deliver alpha if the predictions are correct.

In 2019, when asked what invention will be as revolutionary in the 2020s as smartphones were in the 2010s, Bank of America strategist Haim Isreal said, without hesitation, “quantum computing”.

And in 2020, Christian Weedbrook, chief executive of quantum-computing startup Xanadu in Toronto, Canada, told Nature.com: “It is only a matter of time before quantum computers will leave classical computers in the dust.”

It’s too early to say how fast it is coming. But interest and confidence is certainly growing – to the extent that several financial institutions including RBS, the Commonwealth Bank of Australia, Goldman Sachs, Citigroup, and more, have invested in quantum computing startups.

So how long before quantum solutions enter the mainstream, it seems, is only a matter of time.